AAR’s Stake in TNK-BP May Be Sold To Rosneft, Not BP’s

By Mike Weir

BP 's billionare partners in Russia indicated this week that they may sell or IPO their stake in the TNK-BP joint venture if Rosneft buys BP’s share. The billionaires have until Oct. 17 to pre-empt Rosneft and mount a bid for full control of the business.

BP’s 50% stake in Russia’s third largest oil producer, which has been up for sale since June, has attracted two potential bidders: Alpha Access Renova, owned by a group of Russian oligarchs, and Russian state-controlled Rosneft.

The situation can be read in two ways. Either the oligarchs behind AAR are, as they say, reluctant to become financial investors in an illiquid, half state-controlled giant. Or perhaps it is a sign that it is AAR’s stake and not BP’s that will ultimately be sold to Rosneft.

An IPO is unlikely and here’s why. More than a year ago Dow Jones Banking Intelligence (a subscription only service) suggested BP sell out of TNK-BP to a debt-funded investor who, we said, should prepare the business for a partial London listing in anticipation of a return to favorable market conditions (the rationale would have applied equally to an AAR exit).

Fast-forward 16 months, however, and goodwill towards Russian IPOs still seems thin. To be clear, mega deals do not conform to the same workaday equity capital market (ECM) principles which put paid to a string of Russian listings over the past two years–and Megafon’s pending $4 billion flotation may change perceptions–but a 50% or even a 25% IPO of the entity currently known as TNK-BP would face hurdles.

According to sources in the energy ECM banking sector, AAR is part of the problem. Having witnessed past disputes between BP and AAR, few equity investors are prepared to go into business with the latter, which implies the need for a full AAR exit, but as far as IPOs are concerned, that introduces a scale problem.

Even a 25% IPO of TNK-BP could rival London’s largest-ever listing–Glencore’s $11 billion IPO in May last year–which was controversial with investors at the time and remains under water. A full exit, equating to 50% of a $40 billion company loaded with political risk, would imply a listing of unprecedented scope at a time of deep market uncertainty.

So AAR has another option: a straight sale. And the logical strategic buyers are already in the room. BP and Rosneft.

BP, however, does not need the debt that would be required to buy out AAR today. Yet assuming Rosneft is successful in buying BP’s TNK-BP stake–said by some to be the more likely scenario–BP would then be cash-rich and in a position to relieve the oligarchs of their stake, perhaps by resurrecting some form of the offer BP and Rosneft made to AAR in May 2011.

All of that is a bit convoluted, though, and would simply result in a BP-Rosneft partnership which could be achieved more easily (and with fewer fees to bankers and lawyers) if AAR were simply to take a multi-billion dollar golden handshake now by selling directly to Rosneft.

Indeed, some market commentators have suggested that this entire soap opera is merely a mechanism through which AAR is establishing the price it will demand for its stake and not the price it will pay for BP’s.

Mike Weir is a columnist for Dow Jones Banking Intelligence. Click here to subscribe to the service.

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